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Trading > Netto's Numbers

The Equity Volatility Skew and Its Impact on the FX Market

John Netto | Wed, 08/19/2009 - 11:43pm | Forex, Forex Options Strategy, Implied Volatility, Volatility Skew |  1 comment

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The risk appetite/risk aversion sentiment which seems to oscillate on a day-to-day basis has at times put all asset classes into one camp or the other. As I like looking at multiple components to assess the future price direction of the market, the rich implied volatily pricing behind the S and P 500 out-of-the money puts suggests the market is betting on an eventful fall. Taking a glance across at the implied volatility numbers on the 900 strike S and P 500 September puts (30 days until expiry), they are approximately 97 points away from today's close (997). They are priced in at 5 pts or .5 % is the premium you are getting for your short Vega and Theta exposure. However, the 1090 calls are priced at 1.35 pts, or about 1/3 of the price of the puts which is a corresponding distance away.

This is by no means a unique phenomenon, but one we as FX traders should pay close attention to considering the correlation between the FX markets and equity markets over the last 12 months. I have specific strategies to play this dynamic that involve working certain option spreads across multiple markets including the fixed income space, currencies, and equities. To learn more about them go to www.osoktrading.com or email me at jnetto@osoktrading.com.

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